California LLC Case: U.S. Supreme Court declines review

The U.S. Supreme Court has declined to review the Ventas case pertaining to LLC fees paid by LLCs with income from both California and non-California sources. (Ventas Finance I, LLC v. FTB (August 11, 2008) 165 Cal.App.4th 1207; Cal. Sup. Ct. petn. den. on November 12, 2008, Case No. S166870)

This means that the California Court of Appeals decision is final.  (The case will be remanded back to the Superior Court with instructions for the court to properly calculate the fee based on California-source income for years prior to 2007.)

According to the Franchise Tax Board (FTB), they will issue a notice sometime in the next few weeks with instructions on when and how to obtain refunds for LLCs that have income inside and outside the State of California and have filed protective claims for refunds.

Prior to the decision, the FTB imposed the LLC fee on LLCs with nexus in California, based on gross receipts from whatever source derived.  The fee was substantial -- from $900 if the gross income of the LLC was over $250,000 to $11,790 if the gross income was over $5 million.   The Court of Appeals decision means that LLC revenue is subject to apportionment for purposes of computing the gross receipts fee.

  • The Court saw that the "levy" or "fee" was, in reality, a "tax" that must be subject to apportionment to be constitutional, despite the name that the State of California had placed on it.
  • Having concluded that it is a "tax," the Court said it has to be "fairly apportioned" as required by the U.S. Constitution.

Consider amending prior years' returns for any LLC that had income outside the state of California in a year prior to 2007. The statute of limitations is four years, so for a calendar year LLC, you must file a claim for refund for a timely filed 2004 return prior to April 15, 2009. 

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